Nov. 22, 2019, 7:20 a.m. EST

Cannabis stocks litter the list of most expensive bearish bets

Aurora Cannabis shorts pay a combined $719,000 a day to stay bearish

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By Tomi Kilgore, MarketWatch


Everett Collection
Scene from “The Big Short”

Bearish investors who want to short marijuana stocks remain plentiful, despite the big three-day bounce in the cannabis sector, as the list of stocks with the highest borrowing costs for a short sale includes many in the marijuana business.

A bearish investor first needs to borrow a stock, then sell the stock with the expectation it will be repurchased at a lower price for a profit before the borrowed stock is returned.

But a short seller incurs the cost of a “borrow fee” which is the interest charged to borrow a stock before it is shorted.

Of the 10 stocks with the highest borrowing fees, four are U.S.-listed pot stocks, according to data provided by Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners .

Then in addition there is the risk of a loss in principle by having to buy the shorted stock back at a higher price.

For example, the ETFMG Alternative Harvest exchange-traded fund /zigman2/quotes/204332491/composite MJ +0.31%  surged 8.2% Thursday. The ETF has run up 16% amid a three-day win streak since closing at a record low of $16.07 on Monday. The ETF was still down 27% over the past three months, while the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.11%  was up 6.2%. See Cannabis Watch.

Don’t miss : Short sellers are not evil, but they are misunderstood.

The fee to borrow Aurora Cannabis Inc.’s stock /zigman2/quotes/210559470/composite ACB +2.45%   /zigman2/quotes/203734337/delayed CA:ACB +1.76%  was the third highest overall, and the highest of the four cannabis stocks, at 66.55% as of Wednesday. That means it cost an annualized $1.75, or 1.3 cents a day, to short one Aurora stock at Wednesday’s closing price of $2.64. So a year from now, the shorted stock would have to be bought back at 89 cents just to break even.

Also read : Cannabis stocks soar across the board as historic House vote lures investors back to battered sector.

/zigman2/quotes/204332491/composite MJ 12.82, +0.04, +0.31%

Aurora’s borrowing fee compares with fees of 0.3% to 0.5% for “general collateral” stocks, or those of large-capitalization companies with enough shares outstanding that finding enough shares to borrow would never a problem.

Borrowing fees for shares of Apple Inc. /zigman2/quotes/202934861/composite AAPL +1.96%  and Tesla Inc. /zigman2/quotes/203558040/composite TSLA +5.13%  were 0.3%, while the stock with the highest borrowing fee was Revlon Inc.’s /zigman2/quotes/207032377/composite REV -2.34%  at 75.05%, according to S3 data.

The high cost to short Aurora’s stock comes as the stock plunged 17.0% last Friday, and tumbled 16.5% on Monday, after the company reported disappointing quarterly results and said it planned to cut spending.

See also : All the excuses cannabis companies are making for an ugly crop of earnings.

The other three weed stocks with the highest borrow fees were 63.05% for Tilray Inc. /zigman2/quotes/209129655/composite TLRY +3.33%  , 47.05% for Hexo Corp. /zigman2/quotes/206508254/composite HEXO +10.82%   /zigman2/quotes/200008967/delayed CA:HEXO +12.90%  and Aphria Inc.’s /zigman2/quotes/207425803/composite APHA +2.66%   /zigman2/quotes/205566616/delayed CA:APHA +1.84%  40.8%.

Another cannabis stock that made the top 20 list is Canopy Growth Corp.’s /zigman2/quotes/200603886/composite CGC +0.52%   /zigman2/quotes/202205609/delayed CA:WEED +0.09%  at 25.8%.

The willingness to pay high fees to hold short positions in pot stocks comes after the sector has been beaten up for months, amid a series of scandals, regulatory uncertainty and disappointing financial results.

See related : Cannabis companies are having a horrible summer as scandals mount and stocks slide.

Aurora’s stock tops another dubious list of U.S.-traded stocks that have a minimum short interest value of $50 million, with the largest daily stock borrowing expense. The value of Aurora stock shorted was $388.9 million as of Wednesday, implying a combined total borrow cost of $718,975 per day, S3 data showed.

Others high on the list were Canopy at $455,656 a day, Tilray at $290,243 a day and Aphria at $165,384 a day.

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/zigman2/quotes/200603886/composite
US : U.S.: NYSE
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/zigman2/quotes/202205609/delayed
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Tomi Kilgore is MarketWatch's deputy investing and corporate news editor and is based in New York. You can follow him on Twitter @TomiKilgore.

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